U.S.-China Trade Friction Casting a Shadow over the Chinese Economy

U.S.-China trade friction, which has developed into a trade war, is casting a shadow over the Chinese economy. How the trade friction will play out will be the key to the future course of the Chinese economy.

The announcement in March 2018 of the sanctions against China based on Section 301 of the U.S. Trade Act acted as a catalyst for the escalation of U.S.-China trade friction. As is symbolized by the tit-for-tat tariff hikes implemented by the two countries, the trade friction has developed into a trade war.

In response, China’s exports to the United States, and by extension, its overall exports, which had remained robust until October, supported by last-minute demand ahead of the imposition of additional tariffs, have slowed down sharply since November (Figure 1). In addition, since the second half of 2018, declines in the major economic indicators, including the Purchasing Managers’ Index (PMI) and the growth rates (year-on-year changes) of industrial production, retail sales and fixed asset investment, have also becoming clear (Figure 2). Reflecting this situation, China’s annual economic growth rate in 2018 fell to 6.6%, the lowest level since 1990 (3.9%). (The economic growth rate in the fourth quarter of 2018 was 6.4%, the same as that in the first quarter of 2009, when the Chinese economy was impacted by the Lehman crisis).